Case Study
Just prior to the onset of the COVID-19 pandemic, we worked with a national association that was reviewing its level of reserve funds. They came into the assessment in a good position after several years of considerable growth. In fact, some of the organization’s board members began to feel the organization had amassed more than sufficient reserves.
In conducting the assessment, the association set out to identify and quantify the specific risks the organization may face. They looked back through their financial results to arrive at a data-driven assessment of their reserve needs. The association also used benchmarking data from the ASAE Foundation’s Association Investments study for perspective into the policies of similar organizations.
As the board suspected, recent growth filled the coffers but not too far above the determined need. The association would be able to fund about one year’s operating expenses with the small excess funneled back into member benefits. The reserve funds were split with three months of expenses earmarked for an operating reserve and the remainder in a long-term reserve. We updated the reserves policy to accommodate the changes.
Shortly after implementation, COVID-19 disrupted this association’s carefully laid plans. The pandemic caused the association to cancel its annual meeting along with some smaller revenue-generating certification programs. With revenue down substantially, the organization turned to its operating reserves for support. Those assets provided a lifeline to keep the organization afloat but were soon depleted.
The next logical turn was to tap the long-term reserves to help plug the lingering revenue shortfall. However, while the investment markets had begun their recovery, they were still in negative territory. The board was understandably hesitant to sell these assets even at a modest loss. They worried their recently strong financial position would be irreparably harmed.
At the time, interest rates remained low and borrowing was affordable. We recommended
the association consider using the long-term reserve as the basis for a margin loan to avoid
selling the assets. In this way, they could continue to cover the operating expenses and
maintain their full market positions. After consideration of the merits, the board accepted the recommendation.
Since taking the margin loan, the investment markets have continued to climb, with the return on the assets outpacing the interest due on the loan. A set timetable has been determined for the loan’s repayment through a combination of investment earnings and future revenue.
Through attentive and proactive oversight of its reserves, the association has been able to cover its current operations and maintain its longer-term financial stability.